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Swiss real estate market: Soft landing in sight
The Swiss real estate market remains on course for a soft landing. Despite the sharp decline in demand for owner-occupied residential property, supply is rising only slowly due to the current shortage. Although price growth has recently waned significantly, it is likely to remain positive through the end of the year. By contrast, the rental housing market is still rapidly headed toward a shortage and rental properties are becoming more expensive. In addition to rising market rents, existing rents will now increase significantly as well as a result of the first reference rate hike in June. In terms of the overall real estate sector, the economists at Credit Suisse see enormous potential in the use of artificial intelligence combined with other technologies over the next few years.
Inflation and interest rate developments are still focused heavily on the Swiss real estate market. Many market participants underestimated the persistence of inflation, and the latest figures also show that the issue will not be so swiftly eradicated. Second-round effects, such as impending rent increases due to the rise in the reference interest rate in early June, are preventing any rapid deceleration in price growth. Further interest rate hikes by the Swiss National Bank are thus likely to follow this June and September. Despite this challenging market environment, the Swiss real estate market is holding up much better than many of its counterparts elsewhere and is still on course for a soft landing.
Market for ownership gradually cooling
Although higher interest rates are weighing heavily on demand, the supply of residential property to buy is increasing only slowly due to its previous scarcity. The supply rates for condominiums and single-family homes remain at low levels, namely 1.8% and 1.6% respectively. As a result of the decline in demand, price growth weakened significantly in Q1 2023. Prices for condominiums rose 3.5% year-over-year, while those for single-family homes rose 3.6%. The economists at Credit Suisse expect a marginal gain of 0.5% for condominiums and 1.5% for single-family homes by the end of the year. However, due to the persistent waning of demand, we are anticipating annual price declines in low single-digit percentage territory from 2024 onward. Due to developments over the last few quarters, the economists at Credit Suisse presume the market for owner-occupied residential property will likely experience a soft landing with manageable price corrections after prices rose almost continuously for 21 years.
Finding a rental apartment is becoming more challenging
In the case of multi-family homes containing rental apartments, by contrast, investors should be anticipating a decline in prices before the current year is out. Improving rental income prospects will cushion any price correction, however. The supply of available apartments is rapidly dwindling and is becoming increasingly scarce. The annual moving average for the supply figure fell to 4.4% in Q1 2023, which it has not dropped below since 2016. Market tension remains particularly strong in the greater Zurich region. The developments are astonishing in some regions far away from the major centers, where some supply figures and marketing costs are even hitting new record lows. Although the phrase "housing shortage" is an overstatement of the current situation in many places, finding a home has become much more challenging. We are therefore expecting a further significant decline in vacancies and a surge in rental price growth. For the year as a whole, we project market rents to rise by 3%.
Rising reference interest rate means up to 10% higher rents
After the reference interest rate was raised from 1.25% to 1.5% at the beginning of June, a second hike to 1.75% is likely to follow in December. As a result of the hikes, net rents assessed at a reference interest rate of 1.25% are thus likely to rise 6% by April 2024. Since landlords can claim an additional 40% of the cumulative inflation and (typically) 0.5% of general cost increases annually, this rise could even be as much as 10%. However, since rent reductions often need to be actively requested by the tenant, the increase in rent is likely to be lower on average and total up to 7%. For many tenants, the rise in rent is ill-timed since they are already facing massive increases in ancillary costs and energy costs. At the same time, rising rental income is easing the pressure that higher interest rates are placing on property values.
ChatGPT and co. Is AI revolutionizing the real estate sector?
ChatGPT is another topic that has been all over the media and the private sphere for several months now. Many of us have likely had our first chance to play around with this tool based on artificial intelligence (AI) already. What benefits do such AI tools offer for the real estate sector, though? The economists at Credit Suisse have tried to answer this question using various application examples. To do this, they had such AI tools write real estate advertisements, draw floor plans, search for the ideal residential communities for commuters, and appraise real estate. Their conclusion was that language models and other AI applications can already be put to good use in practice. Their benefit remains limited, however, and in some cases they can deliver unusable or erroneous results. However, they see enormous potential in the coming years when combined with other technologies.
Metaverse: Between hype and disillusion
By contrast, public interest in the metaverse – which rode a wave of hype as recently as the end of 2021 – has waned considerably of late. The metaverse has not delivered the expected results thus far. The transition to this new technology involves substantial costs, and is therefore taking place only slowly. Despite the opportunities for the real estate industry, there are also various risks that need to be kept sight of with any presence in the metaverse. For the time being, therefore, it would be wrong to talk of a metaverse revolution. That said, it would be premature to write the metaverse off completely, as there is a very real possibility that it will experience a similar development to the internet, to the point where we might not be able to imagine life without it in a few years’ time.
Figure: Rental price development as a reflection of supply
Annual growth rates for rents offered, by monitoring region (Wüest Partner)